Vacation home vs Investment Property

[Kim Rock]

Does anyone know the rules on taking out a loan as a vacation home vs an investment property? If youre going to rent it out but also use it? Is there a time frame you must spend there per year to have it be considered a vacation home instead of an investment?

[Jon Holdman]

A loan doesn't need to be assumable to buy the house subject to. You just leave the existing loan in place and start making the payments. The deed and title insurance will specify the existing loan as an exception. Yes, it violates the due on sale clause, but, at least for now its unlikely to be called. If interest rates go up, though, who knows.

As an investor, you must, must, must buy at very steep discounts. If $330K is the retail prices of the house, you need to pay $230K or less. You cannot be successful as an investor by paying retail.

As an ordinary rental, a $330K house would almost never make sense. Here's how I'd evaluate it to determine the minimum required rent to make it make sense:
P&I payment will be $2200 on $330K at 7% for 30 years. That assumes 100%, which is a good way to evaluate the deal even if you end up having to put money down. No matter how many times people as "will cash flow with 20% down", the down payment DOES NOT change the quality of the deal.

We'll use the rule of thumb that rental expenses are 50% of rent. And, we'll assume you'd like to make $100/month in real cash flow. So, we have to take the $2200, add $100, and double it. That means that as a straight rental, you would need $4600/month in rent.

I'd ask if you think you can get that, but it sounds like this is a vacation rental rather than long term. That topic has come up several times here, and I don't think we've every had a detailed, factual set of data about expenses for vacation rentals. In the 50% rule of thumb, there is something like 10% for property management. And maybe 5-10% for vacancy. I think both of these are much higher for vacation properties, especially seasonal ones. OTOH, the rents are priced on a nightly or weekly basis, so also tend to be higher. So, maybe using the actual collected rent (to negate the higher vacancy) and keeping with 50% (to account for higher management, though I've heard of this as high as 30% for vacation rentals) expense ratio would get us into the right ballpark.

So, can you manage to collect something like $4600/month?

If you're thinking about subject to, you need to evaluate the value of the house vs. the loan balance. Subject to really only makes sense if there's significant equity.

Finally, you list yourself as an agent. If that means licensed, you might want to be sure that doing some of these creative techniques, or for that matter, just plain buying a house below retail value, violates your code of ethics.